Glencore's Viterra harvest

Glencore chief Ivan Glasenberg presumably believes the proposed merger of Glencore and Xstrata is going to take quite some time to execute if the speculation of a $US5 billion Glencore bid for Canada's dominant grain handler, Viterra, is to be believed.

Over the past week the market has been rife with speculation of a Glencore move on Viterra (which owns the former ABB business in Australia) after Viterra disclosed it had been approached by several interested parties. Other prospective bidders mentioned have been Archer-Daniels-Midland, Cargill, Bunge and France's Louis Dreyfus, with which Glencore conducted inconclusive takeover talks a year ago.

In the context of a $US90 billion merger, a $US5 billion-plus bid for Viterra probably isn't something that would cause the Glencore/Xstrata deal to be rethought or reshaped, particularly as the need to obtain a myriad of regulatory consents as well as shareholder support probably means it will be well into the second half of this year, at least, before the merger could be consummated.

With legislation to enable the deregulation of the Canadian wheat and barley market last year and the end of the 70-year monopoly on wheat and barley exports by the Canadian Wheat Board, moreover, Glasenberg may feel that he has no option but to get involved before someone else beats him to control of Canada's (and Australia's) biggest grain handler.

Once the Canadian market is opened to competition in August, Viterra is well placed to evolve from being an agent of the CWB in Canada to being able to participate in the full grains value chain. That has prompted loots of speculation that one of the international heavyweights like Cargill or Archer-Daniels might make a pre-emptive strike.

Glencore, while it does have a sizeable agricultural commodities business, isn't a major player in wheat in North America but has made it very clear that it would like to be. It needs the physical grain-handling infrastructure of a Viterra – silos and export terminals – to create the model of physical logistical assets and trading that conforms to its model.

Viterra's market-leading position and the chance to leverage that in a deregulating market means, of course, that if Glencore decides to pursue the former co-operative it will have to face down potentially a number of equally keen suitors including, perhaps, some unconventional ones.

At first glance it might appear odd that Glencore would be interested in bulking up its agricultural commodities trading operations even as it proposed to dramatically increase its exposure to the traditional resources sector through the merger with Xstrata.

The concept, however, would – apart from its existing presence in soft commodity markets – be analogous to BHP Billiton's ambition of entering the potash market. Despite failing to win Canadian Government approval for its bid for Potash Corp, BHP is pushing ahead with its potentially massive Jansen greenfields potash project to enter the industry.

The rationale for the Potash Corp bid and the subsequent decision to push ahead with Jansen (a development that could be slowed if the world economic outlook continues to deteriorate and hard commodity prices fall back further) was relatively simple and quite long term.

The BHP view is that the developing world will increasingly consume more protein and calories-rich food as its living standards continue to improve. Fertiliser was a way for it to get an exposure to that rising demand, to add more diversification to its hard commodity and energy portfolio and to create a growth business for when demand for hard commodities tapers as the developing economies, and China and India in particular, enter a more mature phase.

That same long-term view has informed the massive consolidation of the agricultural sector globally in recent years and has seen all the major available grain handlers and marketers in this market, other than Graincorp, absorbed into international businesses.

It has also prompted the emergence of a number of Asian-based commodity trading houses, like Wilmar International and Noble Group, which have been active in acquiring both hard and soft commodity producers. Wilmar, of course, owns the former CSR sugar business, Sucragen, while Noble has been very active in the coal sector. China's Bright Foods is another searching for acquisitions in Australasia.

It is not inconceivable that there could be Asian interest in Viterra.

Glencore, with large operations in Russia and Eastern Europe, and a presence in South America, would recognise the short term opportunity to take advantage of the Canadian deregulation and the longer term opportunity of creating a presence in agriculture consistent with its market-leading positions in hard commodities.

There won't be many opportunities to do so, although Gavilon Group of the US – spun out of ConAgra four years ago – has been put on the market with a similar price tag of about $US5 billion by its private equity owners.

It is a dearth of remaining opportunities for large-scale consolidation of the sector that would suggest that Glasenberg can't wait around to learn the fate of the merger with Xstrata if he wants to properly bulk up Glencore's agricultural commodities activities – and that a bid for Viterra, if one is made, won't be cheap.